Published:

02/02/2013 11:02am

Parallel IRS Investigations Have Returned After a 35-Year Hiatus

Danger is lurking in the world of Internal Revenue Service audits, namely, parallel investigations. Parallel investigations by the IRS are simultaneous civil and criminal investigations of an individual or business entity, which means that taxpayers can be under investigation for criminal tax matters at the same time a civil audit is being conducted.

A parallel investigation is not a joint, but rather two separate, yet simultaneous investigations being conducted by the criminal investigation and civil examination divisions of the IRS. Although the two divisions may coordinate, they do not direct each other's actions during the investigation.

Recent changes to IRS policies direct IRS personnel not to inform the taxpayer when a criminal investigation is taking place, nor is the civil investigation required to stop when a criminal investigation commences. Therefore, it is essential for taxpayers and their advisers to be aware of the dangers lurking in the shadows of civil examination activities and audits, and the possibility that those activities may be used to gather information for a criminal investigation.

Prior Procedures
Prior to 1977 there was a free flow of information between agents conducting both civil and criminal investigations since there were no procedures for conducting parallel investigations. In fact, agents conducting criminal investigations often solicited the help of agents conducting civil examinations to obtain documents and records that added value to the criminal case. That all changed with the U.S. Court of Appeals for the Fifth Circuit's decision in U.S. v. Tweel, 550 F. 2d. 297 (1977).

In Tweell, the IRS agent continued an investigation of a taxpayer after evidence was obtained through the IRS agent's deception of the taxpayer's representative as to the criminal nature of the investigation. The court suppressed the evidence even though the taxpayer's accountant had voluntarily turned over records to the IRS agent. The Tweel case compelled the IRS to implement procedures directing its agents who discovered firm indications of fraud during an audit to cease the civil examination and refer the case to the criminal investigation division. Thus, parallel investigations were no longer a concern for taxpayers subject to a civil audit, even if fraud was evident, after the Tweel case.

Current Procedures and Related Perils
Quietly, in August 2009 and 2010, the IRS changed its procedures with respect to parallel investigations, and, pursuant to Internal Revenue Manual (IRM) Section 5.1.5.1, parallel investigations are now permissible. The IRM contains policies, procedures, guidelines and instructions directing the operation and administration of the service. The change is based in large part on the ability of other federal agencies, such as the Securities and Exchange Commission and the Justice Department, to operate similarly in the conduct of parallel investigations.

The SEC and DOJ have both had great success utilizing parallel investigations in the financial fraud arena. The change to IRM Section 5.5.5.1 came soon after several cases were settled in the favor of the government allowing parallel investigations for the SEC and the DOJ. In one of the cases, U.S. v. Stringer, 521 F.3d 1189 (9th Cir. 2008), the decision stated that the government may not affirmatively mislead defendants to hide the existence of a criminal investigation. The government is under no obligation to inform targets about a criminal investigation as long as the defendants are generally aware that prosecution can take place. Finally, where a civil investigation was initiated prior to a criminal investigation, the criminal investigation agencies may use and help guide the civil investigation to assist in developing evidence in the criminal case.

Although Tweel is still good case law, the IRS is now relying on a Supreme Court case, U.S. v. Kordel , 397 U.S. 1 (1970), that permits parallel investigations so long as the government does not proceed in bad faith. The Kordel case is the case that is being used by oth